Host Marriott 2004 Annual Report - Host Hotels & Resorts, Inc

RevPAR at our hotels will continue to increase. Improvements in
RevPAR for the first half of 2004 were primarily driven by
increases in occupancy at our hotels. In the second half of 2004,
increases in RevPAR were attributable to increases in both occupancy
and average room rates. We expect that demand will continue
to grow and allow for additional growth in average room rates
in 2005. This is a result of a number of positive trends such as
strong U.S. GDP growth, low supply growth of new hotels, a continued
increase in corporate transient demand and a solid group
booking pace. Historically, we have seen that lodging demand in
the United States correlates to GDP growth, with typically a one to
two quarter lag period, especially within the luxury and upperupscale
sectors of the lodging industry. Therefore, given the relatively
strong U.S. GDP growth in 2004 and the GDP forecasts for
2005, we are optimistic about improvements in lodging demand in
2005. As a result of these trends, we expect our comparable hotel
RevPAR to increase approximately 6.5% to 8.5% for 2005.
In addition to the favorable demand trends forecast to affect
the lodging industry in general, we believe we will be able to
capitalize on the low supply growth trends that have existed
during the past few years. Supply growth in the lodging industry
and the geographic markets in which we operate may be influenced
by a number of factors, including growth of the economy,
interest rates, local considerations and the relatively long lead
time required to build urban and resort/conference hotels. We
believe that the low construction levels over the past few years,
together with low expectations for additional supply growth over
the next few years, will lead to an imbalance between supply and
growing demand that will allow for improved RevPAR performance
at our hotels.
In terms of profitability measures, operating margins were
relatively unchanged for the first half of 2004. However, operating
margins increased in the second half of 2004, as the average
room rate increases at our hotels began to exceed the rate of
inflation for the first time since 2000, resulting in an overall
increase for the full year for our comparable hotels. Operating
margins continue to be affected by certain of our costs, primarily
wages, benefits, utilities and sales and marketing, which
increased at a rate greater than inflation. We expect these costs
to continue to increase at a rate greater than inflation in the
near term. As noted above, approximately 31% of our revenues
are from food and beverage operations. During 2004, food and
beverage revenue growth at our comparable hotels was 5.7%.
As the economy continues to expand in 2005, we expect to see
an increase in our catering revenues, which should improve our
food and beverage operating margins.
We also may see improvements in RevPAR and operating
margins as we continue our strategy of recycling assets. As noted
below, over the past year we have been acquiring upper-upscale
and luxury properties in urban and resort/conference locations,
where further large-scale lodging development is limited, and
selling assets in suburban, secondary and tertiary markets. The
assets we have been acquiring have higher RevPAR, higher operating
margins and, we believe, higher growth potential than
those we have sold. Over time, this should contribute to
improvements in overall RevPAR and operating margins.
During 2004, the average RevPAR penetration index for our
comparable hotels modestly declined, but it remains at a pre-
mium in relation to our competitive set. This follows a similar
decline in our average RevPAR penetration index for our comparable
hotels in 2003. Market share at our urban and airport
hotels increased slightly in 2004, reversing the prior year trend
as a result of the increase in business travel; however, market
share continued to decline at our suburban properties and our
larger convention hotels. We believe that this decline in market
share over the past two years occurred because:
• our hotels generally have a higher percentage of their revenues
generated by corporate group and corporate transient
customers than their competitors and that business in the
upper-upscale and luxury segment did not begin to significantly
increase until the second half of 2004;
• certain of our properties overcommitted to lower-rated
group business late in 2003, which has resulted in those
properties being unable to take advantage of higher-rated
transient business as travel increased in 2004;
• we have a significant number of large hotels in our portfolio,
including nine convention hotels with greater than 1,000
rooms, which require longer periods of time to rebuild their
customer base; and
• new supply in several of our markets affected our hotels.
As lodging demand continues to grow and, in particular, as
corporate group and corporate transient business strengthens,
we believe that our hotels may regain the majority of the market
share lost in 2003 and 2004.
While we believe the combination of improved demand
trends and low supply growth trends in the lodging industry
creates the possibility for improvements in our business in
2005, there can be no assurances that any increases in hotel
revenues or earnings at our properties will continue. The trends
discussed above may not occur for any number of reasons,
including:
• slower than anticipated growth in the economy, business
investment and employment and changes in travel patterns;
and
• the continued threat of additional terrorist attacks, high oil
prices, airline strikes and other factors that may have an
adverse impact on travel and lodging demand.
All of the above, as well as the risks set forth in the section
“Forward-Looking Statements” may result in lower revenues or
higher operating costs and declining operating margins.
MANAGEMENT’S PRIORITIES
Based on forecasted operating conditions, our key management
priorities over the next several years include the following:
• to work with our managers to increase revenues and
minimize operating costs;
• to invest capital in our existing portfolio to maintain our
assets and pursue repositioning/return on investment (ROI)
opportunities. Potential investments at our hotels could
include increasing the number of rooms, building a spa,
fitness facility, convention or meeting space or upgrading
the infrastructure, such as energy efficient heating and
cooling systems;
• to invest in opportunities to enhance the value of existing
assets by converting underutilized space to alternate uses
such as timeshare or condominium units;
19
HOST MARRIOTT 2004